Going to the bank and announcing that unfortunately I will be forced to poop in the lobby if I am not supplied with enough dollars
Give me money or I’ll go to the other bank who absolutely will
Somebody’s lobby is getting pooped in if that supply of dollars does not come through
If you see some loose copper sticking out of the wall, may as well start pulling
Really don’t see how that’ll solve their problem which is that their currency peg is under pressure? Unless China provides their own currency swap arrangement or loan to UAE.
Devaluation must be really scary thing for them considering how long they’ve held their $1=3.67 Dirham parity. Everyone has planned and expected that rate. Abandoning it is much riskier for UAE than some settlement being done in Yuan for the US.
That said, UAE has trillions in Dollar denominated assets in their SWF, just that it’s mostly in illiquid assets seeking higher returns.
I think it’s more about liquidity and credibility than actual “UAE being broke” issue. Credibility also matters, if UAE starts selling assets to maintain peg, it’ll create speculative pressure which will further increase outflows. A currency swap arrangement is generally good market optics.
I think they’re trying to end the war because they want their ships to go through the strait and raising this is pretty much the scariest thing the US could hear.
they take the money and immediately turn around to buy assets with it
I think it’s more about liquidity and credibility than actual “UAE being broke” issue.
That’s still very problematic isn’t it? They aren’t broke per-se but if they can pay for imports by exporting in Yuan, that saves them from currency pressures like a sudden shortfall comprised of their entire export balance.
It’s the UAE. Their policy is to take the most evil position and then fail. This means asking for dollars from the Empire, which is in its interest to provide, and then fail to secure even a loan from imperial institutions.
Issue is trade is only a small component of balancing international payments. UAE has no capital controls, so anyone can swap Dirham for Dollar freely, and their Central Bank must defend the rate they set. It’s basically a money laundering haven so…
I would expand the third point is even more complicated and it’s not just independent monetary policy but also independent fiscal policy you have to give up. At the extreme, no matter how high the interest rate is, a peg cannot be defended without running out of reserves. Basically you cannot:
- Provide absolute promise to provide a fixed rate for converting local currency to another. (fixed exchange rates)
- Provide convertibility in unlimited amounts. (no capital controls)
- Unconstrained (Gov spending and bank credit creation) creation of domestic money convertible into foreign currency i.e. demand to convert domestic money into foreign currency does not exceed the system’s capacity.
All at once. UAE does so because its reserves are so large attacking the peg is very difficult and usually impractical but mechanically the peg is theoretically breakable, even currency boards like Hong Kong are (they only back base money, not all money). So credibility matters a lot.
they only back base money, not all money
Could you please unpack this? What is base money?
Base money includes some of the Government liabilities like bank notes, coins, settlement balances (also known as reserves which are balances held by commercial banks at Central Bank used to settle payments between banks). It does not include Government bonds.
More importantly, it doesn’t include bank loans. Commercial banks create money too, they use leverage to create bank loans in excess of liquid assets they have which creates bank deposits (bank money). This is called endogenous money. And this bank money is special in that it is ‘money’, Government accepts it to settle debts you owe to it (eg. taxes, fees, fines), contracts are also largely enforced in bank money (you cannot buy a house with cash in many countries for instance, you can with bank money).
Another thing, bank money is also freely convertible to base money at par ($1 of bank money = $1 of base money). The Central Bank makes sure that’s the case so there are no run on banks, when you make a transfer from one bank to another, base money is used (aforementioned settlement balances), you also convert bank money to Government’s by withdrawing cash (since that’s a Govt liability). If there is a system wide shortage of settlement balances, the Central Bank must provide it else risk payments system failing at the extreme.
Given that bank money is freely convertible to base money, that bank money is created well in excess of base money (due to leverage), and that the base money is convertible without capital controls to USD (for example), the ‘currency board’ cannot guarantee convertibility to US Dollars in a mechanical sense. The usual claim that currency boards cannot be broken isn’t true.
Raising interest rates is a way to keep people from exchanging base money for foreign currency, acts as a sort of an incentive. This cannot work in the extreme, e.g. Russia in the 90s where Central Bank raised rates to triple digits, paying out billions in Rubles which were convertible to US Dollars.
Of course, this doesn’t apply if your currency floats, in this case any intervention becomes discretionary.
China has a gazillion US dollars. I don’t understand why the UAE would be forced to sell in yuan. The UAE are the ones receiving currency in an oil trade. Why do they need liquid dollars? I am not a finance bro
Closure of the Strait is costing hundreds of millions per day. They can use the Strait if they sell in Yuan, they can’t use the Strait if they sell in dollars.
The petrodollar agreement between the middle east states and the US is basically a protection racket, the US “protects” them (by not doing regime change) in exchange for those states agreeing to sell their oil using dollars. This is the foundation of what made the dollar into the international reserve currency and the primary currency used for all trade, because the dollar was secured against oil, the petrodollar.
It is the backbone of the dollar’s value and stability.
Slight correction. WW2 was what made the dollar into the global reserve currency. The petrodollar is what allowed the value of the dollar to remain despite them dropping the gold standard.
Trump did this…for Putin.
JDPON,… Putin???
Not sure if seriously
